Misclassification of workers costs taxpayers billions of dollars, harms companies that follow the law and is much more widespread than previously thought, a new report from the Economic Policy Institute says.

Because misclassification is fraud, it is very difficult to know with precision how bad it is or where it is worst. But the report collects the findings of disparate state and federal investigations, court cases and IRS audits, to present a picture of a shadow economy of millions of exploited workers.

The report’s author, Francoise Carré, found between 15 and 30 percent of employers designate workers who should be full-time employees as independent contractors. As a result, they avoid immigration rules, overtime and minimum wage laws as well workers’ rights protections that only apply to full and part-time employees, not contractors.

“This is terrible for the guys doing these jobs, no overtime, no organizing rights and no unemployment or health insurance, but it is also a disaster for the good guys trying to compete on the level,” said the IBEW’s Construction and Maintenance Department Director Jim Ross. “This report shows why it is so hard to find these criminals, and why they have to be punished.”

The report issued June 8 estimates the annual federal and state tax losses rise into the billions. They had no estimate for the lost income to the workers.

Misclassification also allows unscrupulous employers to skip their share of Social Security and Medicare taxes, state workers' compensation and disability insurance payments. According to the report -- (In)Dependent Contractor Misclassification-- by fraudulently misclassifying full-time workers as independent, employers can reduce their payroll costs between 20 and 40 percent.

Misclassification happens in all sectors of the economy, Carré found, but it is more likely to happen when it is most profitable and easiest to hide under layers of subcontractors, a perfect description of the construction industry.

A 2001 to 2003 study in Massachusetts, for example, found nearly 20 percent of employers misclassified workers. In construction, nearly one in four employers misclassified at least one employee, but on average, they incorrectly identified half of their workforce as independent contractors.

Carré also found regional differences in misclassification. Not surprisingly, in states with already weak worker protection, misclassification is also more common. In Texas and North Carolina, the study found, nearly a third of construction companies misclassify at least part of their workforce.

“The loss of billions of dollars in tax revenue creates a significant financial burden for local, state and the federal government,” Carré wrote.

The complete report can be found on the EPI website.